UK: Family Takaful

Last Updated: 6 February 2007
Article by Benjamin Macfarlane

Although family takaful is the Islamic equivalent of life insurance, fundamental differences separate the two systems. A better understanding of the principles behind takaful, the laying down of clearer rules for the formulation of policies and a defined role for agents and brokers are essential if market penetration is to increase.

Family takaful does not mean the insurance of a life, but rather it is a financial transaction which undertakes to protect widows, orphans and other dependents of the assured against future unexpected financial risk. At the core of the system is the notion of al-Mudharabah (profit sharing) without the element of riba (interest), which is proscribed under Shariah law.

Various types of family takaful plan are available in the market including:-

  1. Family takaful Plan for Education;
  2. Family takaful Mortgage Plan;
  3. Group family takaful Plan; and
  4. Group Hospitalisation and Medical Benefit.

Aspects of family takaful

A family takaful plan is a long-term saving and investment programme with a fixed maturity period. The plan, apart from enjoying investment profit, provides mutual financial assistance among its participants. The family takaful plan is a programme that pools the financial contributions of its participants to provide assistance across the community in times of need.

A person who takes out a family takaful plan is called a participant. A participant may choose any one of the plans offered by the takaful company. The plans have a defined period of participation; the company and the participant entering into a contract based on the principle of al-Mudharabah, which spells out clearly the rights and obligations of the parties. The participant is required to make regular instalment payments in consideration for his participation in the takaful plan.

Each instalment paid by the participant is divided and credited by the takaful company into two separate accounts: (1) participant’s account (PA) and (2) participant’s special account (PSA). A substantial proportion of this instalment is credited into the participant’s account solely for the purpose of his savings and investment. The balance is credited into the participant’s special account as a donation (tabarru) for the purpose of mutual help.

The takaful instalment credited into these two accounts is pooled as a single fund for the purpose of investment activities undertaken by the takaful company in a manner permitted by Islamic law. Any profits generated from the investment are shared between the participant and the company in a ratio to be mutually agreed between them under the principle of profit-sharing.

Principles underlying family takaful

The basic governing principles may be summarised as follows:

  1. The assured, prior to entering into a life insurance agreement, must have an ‘intention sincerely-held’, that the policy will not lead to gain but will seek to provide protection for his off-spring, spouse and other dependants from unexpected future financial risk.
  2. The life insurance policy should not involve riba (interest). It should be based on the principles of the al-Mudharabah financing principle, whereby the insurer as well as the assured or his beneficiaries share the profits, bonus and dividends accordingly. In the event of losses or liabilities, these should be divided and spread according to the community’s pooling system.
  3. In the case of the assured’s death at any time during the policy term, the beneficiary of the assured may not claim the whole amount, only the paid-premiums, a share of profits made over the paid-premiums, bonus and dividends, plus a donation from the company’s charitable fund according to his financial status.
  4. Where the assured is alive at the end of the policy period, he may only claim from the company the paid-premiums, a share of the profits made over and above the paid-premiums, plus bonus and dividends according to the policy terms.
  5. The nominee in a policy may not be an absolute beneficiary under the terms of the policy. He can be a trustee who is then under a duty to receive the benefits from the insurer and distribute them among the beneficiaries of the assured according to the principles of m irath (inheritance) and wasiyyah (bequest).
  6. The agents in a family takaful are paid out of the share of profit made over the paid premiums by the takaful company.
  7. The company, as regards the investment of the paid premiums, is under an obligation to invest the paid premiums in a lawful business which is free from the elements of riba, ‘gambling’ and other forms of unlawful transaction contrary to Shariah law.
  8. The insurable interest in a family takaful policy should be presented either to the assured himself or to the heirs of the assured according to the principles of mirath and wasiyyah.

Differences between modern life insurance and family takaful

  1. A life insurance policy under the conventional system includes the element of interest where the Islamic model of life insurance policy prohibits its use. Instead takaful operates according to the principle of profit sharing.
  2. Under a conventional life insurance policy, the nominee is an absolute beneficiary. The nominee in a family takaful policy is merely a trustee who is authorised to receive the benefit over the policy on behalf of the assured’s beneficiaries and distribute it among them according to the principles of inheritance and bequest.
  3. Under the conventional system, agents are paid out of the assured’s paid-premiums, whereas under takaful, the agents work for the takaful company and are remunerated by it.
  4. The insurable interest under the conventional system is usually vested in the policyholder himself, if he is still living at the end of the policy period. In the event of his death before the end of the term, the insurable interest will be vested in the husband or wife, parents or children, the benefactor or beneficiary. By contrast, under the takaful model, the insurable interest will be vested in the assured himself or in the event of his death, in his beneficiaries according to the principles of inheritance and bequest.

Conclusion

The object of family takaful is clear: not only to provide future material security for the family of the assured, but also to guarantee support to the other participants of the takaful, involving the entire community and drawing them into mutual obligations and financial cooperation. However, various changes must occur for the takaful system to grow and mature. The capitalization of takaful companies needs to be increased. Marketing needs to be done and more reinsurance (retakaful) encouraged. It must be easier to establish that there is an insurable interest and that the relationship between the parties is ‘legitimate’ and based on the principles of inheritance and bequest. There is a need to agree a minimum age for any contractual party as currently it is set at about the age of majority (rushd), which remains an issue of dispute among Islamic scholars. Finally a network of licensed agents and brokers must be established to promote and develop takaful products and their operation within the Muslim community.

The content of this paper does not constitute legal advice and should not be relied on as such. Specific advice should besought about your specific circumstances.

© B.J. Macfarlane & Co.

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